Deck 14: Introduction to Corporate Financing and Governance

Question 1

If shareholders do not like the policies that management pursues,their easiest solution is to vote in a different board of directors.

Answer 1

True

Question 2

A capital surplus is obtained when the par value of a stock is greater than the retained earnings.

Answer 2

False

Question 3

Dividends are deductible for purposes of calculating a corporation's taxable income.

Answer 3

False

Question 4

In a situation of bankruptcy,only the funded debt will be repaid.

Question 5

Debt financing is riskier than equity financing,but it does provide benefits to the firm.

Question 6

Corporations are less likely to repurchase callable bonds when market interest rates have risen.

Question 7

Callable bonds may be repurchased by the issuing firm before maturity at the specified call price.

Question 8

Retained earnings will decrease when stock is repurchased as treasury stock.

Question 9

When a stock price rises to its par value,it will then be repurchased by the corporation.

Question 10

Differences in classes of stock often appear in their right to vote.

Question 11

Callable bonds require the issuer to borrow money at a higher interest rate when rates rise.

Question 12

A corporation cannot default on debt that is funded.

Question 13

The CEO has ultimate control over the company's affairs.

Question 14

When bonds are selling at par value,the bonds are known as fixed-rate bonds.

Question 15

With floating-rate preferred stock,dividends are linked to the firm's profits.

Question 16

Subordinated debt is an example of short-term debt for a firm.

Question 17

Limiting the size of dividends paid is an example of a protective covenant.

Question 18

The call provision of callable bonds comes at the expense of bond holders,for it limits investors' capital gain potential.

Question 19

Since preferred stock dividends are not deductible for tax purposes,few corporations own preferred stock.

Question 20

The price at which new shares are issued is referred to as the par value of the stock.

Question 21

Bonds with the callable feature sell at lower prices than bonds without such a feature.

Question 22

How much will be recorded as a firm's additional paid-in capital if it issues 1 million shares that have a $5 par value for $15 per share? (Use dollar values)

A) $0
B) $5,000,000
C) $10,000,000
D) $15,000,000

Question 23

Earnings this year for Plasti-tech Inc.were $200,000,of which $60,000 it decided to plow back and 10 % was depreciation.Plasti-tech's internally generated funds are:

A) $40,000.
B) $60,000.
C) $80,000.
D) $140,000.

Question 24

When firms retain cash,they are generating funds internally by increasing shareholder investment.

Question 25

What is the after-tax cost to a corporation in the 35 % tax bracket of paying $50,000 in preferred-stock dividends?

A) $17,500
B) $32,500
C) $50,000
D) $76,923

Question 26

A shareholder owning 100 shares of stock is voting for the board of directors who are elected by cumulative voting.How many votes did the shareholder cast for Director 'A' if four directors are to be elected and the maximum number of votes was cast for 'A'?

A) 25
B) 100
C) 200
D) 400

Question 27

What tax liability is created by a Canadian corporation in the 35% tax bracket that receives $50,000 in preferred stock dividends?

A) $0
B) $5,250
C) $12,250
D) $17,500

Question 28

Eurobonds are long-term,corporate liabilities that:

A) are issued by European firms.
B) are held outside the U.S.
C) are marketed in all countries.
D) are repaid in U.S. dollars.

Question 29

If 100 million shares of common stock are issued with a par value of $2 and additional paid in capital of $800 million,the total par value of the issued shares is:

A) $200 million.
B) $600 million.
C) $800 million.
D) $1 billion.

Question 30

What is the net value of common equity for a firm with 3 million shares issued,1 million shares outstanding,$4 million of retained earnings,$2 million of treasury stock at cost,$1 million in additional paid-in capital,and a $1 par value per share?

A) $4 million
B) $6 million
C) $8 million
D) $10 million

Question 31

Which of the following statements is typically correct for a going-concern firm?

A) book value of equity exceeds market value of equity
B) market value of equity exceeds book value of equity
C) book value of equity equals market value of equity
D) no typical relationship exists between book and market values of equity

Question 32

What will be the effect on retained earnings if a firm with 5,000 shares outstanding earns $10 per share and has a 30% plowback ratio? It will increase by:

A) $15,000.
B) $30,000.
C) $35,000.
D) $50,000.

Question 33

Protective covenants are offered for the benefit of:

A) common shareholders.
B) preferred shareholders.
C) Bondholders.
D) both common and preferred shareholders.

Question 34

What is the book value per share of equity for a firm with $1 million in net common equity,$50,000 in authorized share capital,25,000 shares issued,and 20,000 shares outstanding? (Use dollar value)

A) $38.00
B) $40.00
C) $47.50
D) $50.00

Question 35

Which of the following statements is correct about a corporation that borrows from its bank at "Prime plus one %?" The interest rate:

A) is set at a level of the prime rate at initiation of the loan, plus one %.
B) can fluctuate up to 1 % upwards over the life of the loan.
C) can be changed upwards but not downwards over the life of the loan.
D) can be changed upwards or downwards in accordance with prime rate changes over the life of the loan.

Question 36

A firm's internally generated funds are calculated by:

A) subtracting depreciation from net income.
B) adding depreciation to net income.
C) adding dividends to net income.
D) subtracting dividends from net income plus depreciation.

Question 37

Long-term debt refers to those liabilities that:

A) have established a sinking fund for repayment.
B) are not callable at the option of the firm.
C) are secured by specific collateral.
D) have a maturity of more than one year remaining.

Question 38

Protective covenants prevent bond issuers from irresponsible over-borrowing behavior and are offered for the benefit of:

A) common shareholders.
B) preferred shareholders.
C) Bondholders.
D) both common and preferred shareholders.

Question 39

For most firms,the majority of their funding is generated internally.

Question 40

If a corporation uses cumulative voting,then ______ of a shareholder's vote's _____ be cast for one candidate.

A) some; must
B) none; can
C) all; can
D) all; must

Question 41

Any capital surplus shown by a firm on its balance sheet results from:

A) not paying out all net income as dividends.
B) repurchasing shares for treasury stock.
C) issuing stock at a price higher than par value.
D) retained earnings.

Question 42

When a firm issues 50,000 shares with a par value of $5 for $22 per share,additional paid in capital will:

A) decrease by $250,000.
B) increase by $250,000.
C) increase by $850,000.
D) increase by $1,100,000.

Question 43

Market value is usually greater than book value because:

A) inflation drives market value above original costs.
B) inflation drives book value below original costs.
C) firms tend to invest in projects with very high book values.
D) the cost of capital drives market value up.

Question 44

To state that net equity issues have been negative recently in the North America indicates that:

A) more shares have been repurchased than newly issued.
B) new shares have been sold at less than par value.
C) issuing stock has been a negative NPV transaction.
D) dividend payments have exceeded net income.

Question 45

Book value is a (an)________ measure,while market value is a (an)________ measure.

A) inward-looking; outward-looking
B) more accurate; less accurate
C) forward-looking; backward-looking
D) backward-looking; forward-looking

Question 46

Canadian non-financial firms' average value of debt-to-equity ratios:

A) have fallen slightly over the past 10 years.
B) have risen substantially over the past 10 years.
C) have risen slightly over the past 10 years.
D) have fallen substantially over the past 10 years.

Question 47

Corporations that annually retire a set portion of their long-term debt are said to be using:

A) indexed bonds.
B) sinking funds.
C) convertible debt.
D) secured debt.

Question 48

Which of the following would be considered a Eurodollar deposit?

A) dollars deposited in a U.S bank
B) yen deposited in a European bank
C) dollars deposited in a Japanese bank
D) marks deposited in a German bank

Question 49

A company is about to issue new shares of stock.If the par value per share is $4.00,the price of the new shares will most likely be:

A) Less than $4.00.
B) Equal to $4.00.
C) Greater than $4.00.
D) Equal to the capital surplus.

Question 50

Ray's Jams Inc.was just established with an investment of $5 million into stereo equipment.Ray expects his company to generate $800,000 a year for the next 200 years.If Ray's cost of capital is 15%,find the market value and book value of his company.(Use values in millions)

A) Market value=$9.0 million; book value=$5.0 million
B) Market value=$5.0 million; book value=$5.3 million
C) Market value=$5.33 million; book value=$5.0 million
D) Market value=$7.0 million; book value=$5.0 million

Question 51

Which of the following balance-sheet accounts will not be affected when there is a reduction in the number of outstanding shares?

A) retained earnings
B) additional paid-in capital
C) common shares (at par value)
D) treasury stock at cost

Question 52

The system of electing a board of directors where each director is voted on separately is known as:

A) majority voting.
B) supermajority voting.
C) cumulative voting.
D) proxy voting.

Question 53

All of the following are true of retained earnings except:

A) it is the difference between paid in capital and the total dividends paid.
B) it represents the amount of new capital shareholders indirectly contribute.
C) it is equal to one minus the payout ratio.
D) it is the amount of earnings plowed back into the firm.

Question 54

Which of the following is the holder of a warrant allowed to do prior to a specified date?

A) convert debt into a specified number of shares.
B) sell common shares at a predetermined price.
C) exchange stock for bonds at a specified price.
D) purchase shares at a predetermined price.

Question 55

If the Beta company issues $100 million worth of preferred stock,what will happen to its net worth if book value of common equity is $500 million?

A) it will increase by $400 million.
B) it will decrease by $100 million.
C) it will increase to $600 million.
D) it will decrease to $400 million.

Question 56

Which of the following statements about floating-rate preferred stock is correct?

A) its dividends increase as interest rates increase.
B) its market price increases at a set rate annually.
C) it is the only stock issued without a par value.
D) its dividends are deductible for tax purposes by the paying corporation.

Question 57

Secured debt is debt that:

A) carries a fixed interest rate.
B) is held by a trustee until repayment.
C) has more than one year until maturity.
D) has specific collateral backing it.

Question 58

What will happen to retained earnings when a corporation issues 1,000 shares of $1 par stock for $10 per share?

A) it will increase by $1,000.
B) it will increase by $9,000.
C) it will decrease by $9,000.
D) it will remain unchanged.

Question 59

Preferred stockholders:

A) have full voting rights.
B) receive a fixed dividend.
C) have priority over debt holders if the company goes out of business.
D) All of the choices are correct.

Question 60

Jay's Jams Inc.was just established with an investment of $5 million into stereo equipment.Jay expects his company to generate $800,000 a year for the next 10 years,followed by $1 million a year for the following 10 years.If Jay's cost of capital is 15%,find the market value and book value of his company.(Use values in millions)

A) Market value=$9.0 million; book value=$5.0 million
B) Market value=$5.0 million; book value=$5.3 million
C) Market value=$5.3 million; book value=$5.0 million
D) Market value=$7.0 million; book value=$5.0 million

Question 61

All of the following are types of innovative bonds except:

A) convertible bonds.
B) bowie bonds.
C) mortality bonds.
D) indexed bonds.

Question 62

Giving an investor the right to buy shares in the issuing company at a predetermined rate is termed:

A) option.
B) warrant.
C) private placement.
D) Consideration.

Question 63

When securities are sold directly to a small group of investors is termed:

A) general issue.
B) floating issue.
C) public issue.
D) private placement.

Question 64

What is the rationale for saying that the federal government provides a tax subsidy to corporate debtors?

A) interest and principal payments are tax deductible.
B) interest payments are tax deductible.
C) principal payments are tax deductible.
D) 70 % of interest payments are tax deductible.

Question 65

A proxy contest is typically one in which:

A) the board attempts to gain control from the shareholders.
B) management attempts to gain control from the directors.
C) outsiders attempt to gain control from management.
D) the board attempts to gain control from the directors.

Question 66

Which of the following statements is correct for a firm with 100,000 outstanding shares and earnings per share of $6 if retained earnings were just adjusted downward by $50,000?

A) A $5.50 dividend per share was paid
B) A $6.50 dividend per share was paid
C) net earnings equal $650,000
D) total dividends paid equal $50,000

Question 67

The value of retained earnings on the corporate balance sheet represents the amount of earnings:

A) not paid out in dividends this period.
B) that remains in cash.
C) over and above corporate income taxes.
D) reinvested in the firm since its inception.

Question 68

For Canadian non-financial firms,what source of capital is used the least?

A) debt issues
B) internal funds
C) net equity issues
D) bond issues

Question 69

Which of the following are bonds whose coupon rate is tied to a price index?

A) pay-in-kind bonds
B) indexed bonds
C) reverse floaters
D) asset-backed bonds

Question 70

One way in which control of a corporation can be removed from the current board of directors is to:

A) take away the directors' stock.
B) give voting power to management.
C) remove the board's voting power.
D) fight a proxy contest.

Question 71

The purpose of a sinking fund is to:

A) reduce the par value of stock over time.
B) take advantage of the tax break on preferred stock.
C) periodically retire debt prior to final maturity.
D) allow risky corporations to avoid bankruptcy.

Question 72

Which of the following equity concepts would you expect to be least important to a financial analyst?

A) par value per share
B) additional paid-in capital
C) retained earnings
D) net common equity

Question 73

Which of the following statements is correct concerning stock dividends?

A) common stock dividends cannot be paid if preferred stock dividends are in arrears.
B) preferred stock dividends cannot be paid if common stock dividends are in arrears.
C) neither common nor preferred dividends can be paid if accrued interest is in arrears.
D) no stock dividends can be paid if the firm has no cash.

Question 74

One common reason for issuing two distinct classes of common stock is to:

A) sell different classes to increase profits.
B) allow one stock to increase in price while the other class declines.
C) restrict voting privileges from some shareholders.
D) conserve cash by offering dividends to only one class of stockholders.

Question 75

One way that investors contribute capital to the firm is by:

A) plowing back money into retained earnings.
B) paying less than par value for the stock.
C) receiving dividends and reinvesting them on their own.
D) increasing the amount of treasury stock.

Question 76

Junk bonds represent debt that was issued to:

A) finance the acquisition of used manufacturing equipment.
B) firms in countries with high rates of inflation.
C) offer higher yields and less security than other debt
D) firms that have defaulted on their dividend payments

Question 77

Bonds that have been sold only to a limited number of institutional investors are considered:

A) secured bonds.
B) convertible bonds.
C) private placements.
D) indexed bonds.

Question 78

The benchmark interest rate that banks charge to their best customers is termed:

A) prime rate.
B) convertible.
C) private placement.
D) Lease.

Question 79

A corporation's net worth is composed of the:

A) book value of common equity.
B) par value plus additional paid-in capital.
C) retained earnings less treasury stock.
D) book value of common equity plus preferred stock.

Question 80

Which of the following bonds is likely to be viewed by investors as the most risky?

A) subordinated debt
B) indexed bond
C) secured bond
D) asset-backed bonds